Journal

Economic Pluralism isn’t a right-left thing, but maybe it is a matter of national security

Words by Henry Leveson-Gower

26 July 2017

It might be thought that anyone who criticises the prevailing economic orthodoxy and calls for other approaches to understanding economics must be left wing. They might also be supposed to be anti-markets. However, neither of these suppositions are necessarily true.

One of the most famous cases in point is Margaret Thatcher’ favourite economist, Friedrich Hayek. Hayek was an Austrian economist and firmly outside the neo-classical economics tradition. He was also unsurprisingly a great supporter of markets, but a virulent critic of mainstream or neo-classical economics. In his speech accepting a Nobel Prize in 1974, he said:

“We have indeed at the moment little cause for pride: as a profession, we have made a mess of things. It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences – an attempt which in our field may lead to outright error.”

Mimicking physics was precisely the project of neo-classical economics. He was completely ignored by the mainstream as mathematics became more important not less important in economics over the following decades.

More recently in 2012 Daron Acemoglu and James Robinson wrote ‘Why Nations Fail: The Origins of Power, Prosperity and Poverty’, which is a huge achievement of institutional economics and again highly critical of neo-classical economics. They accuse mainstream economists of ignoring the role of institutions and politics. Acemoglu is a professor at MIT and Robinson a professor at Chicago University, both top universities. The key theme of the book is the superiority of western institutions, in particular reliable property rights, in terms of generating economic growth. This is hardly a radical left position.

On the other hand, leading proponents of neo-classical economics include Paul Krugman in the States and Simon Wren-Lewis in the UK, both seen as politically left of centre. Wren-Lewis indeed was amongst John McDonnell’s economic advisers, before resigning in protest over Labour’s position on Brexit.

In actual fact, those who advocate economic pluralism or pluralist approaches to economics propose that a broader analytical tool kit is necessary to understand the economy than supplied by mainstream methods. We need to understand how humans really make decisions, how all institutions (not just markets) work and evolve, how these complex systems adapt and interact. To do this, different methods may be appropriate to understand different problems. Conclusions from such analysis could end up being seen as right or left wing or somewhere in between.

This approach is actually taken by natural sciences such as physics which economists have so admired. For instance, theories of relativity and quantum mechanics are applied in different contexts. The first to understand the universe and the other to understand the very smallest particles.

So in a similar vein, neo-classical economics might be appropriate to understand short-term impacts where policy change is limited i.e. so called change at the margin which is the focus of this method. Even then it may be necessary to draw on behavioural economics to get a better handle on likely consumer responses to policy.

However if we are looking at long-term change such as the implications of Brexit, methods and insights from institutional and complexity economics are almost certainly required. This is because change is likely to be far from marginal and the result from complex interactions. Furthermore Brexit seems fundamentally motivated by the desire for institutional change and it is precisely the role of institutions outside a highly stylised view of markets, that neo-classical economics neglects as Acemoglu and Robinson so eloquently argue.

This is also true of industrial strategy, a priority of this Government – see recent report from the Industrial Strategy Commission. The neo-classical model of well-oiled markets has in the past been argued to imply the irrelevance at best and dangers at worst of industrial strategy. Industrial Strategy makes no sense in mainstream economics apart from tinkering around the edge fixing so called ‘market failures’. But that is hardly strategic.

So a pluralist approach to economics is about ensuring our policies are supported by the most appropriate evidence and analysis. This is hardly an aim that is solely owned by the left wing.

On the contrary, bad policies can create crises leading to instability and insecurity as we are seeing currently. Hence promoting economic pluralism could be argued to be core to a national security agenda, which is often seen as right wing. Maybe the CIA and MI5 should be investigating the exclusion of pluralist economics from top universities as a matter of national security.